RNC LIQUID ASSETS FUND, INC.
11601 Wilshire Blvd.
25th Floor
Los Angeles, California 90025
RNC Liquid Assets Fund, Inc. (the "Fund") is a diversified, open-end
management investment company. The investment objective of the Fund is to obtain
as high as possible current income consistent with preservation of capital and
liquidity by investing in a diversified portfolio of high-quality, short-term
money market securities. The Fund is a money market fund offering the advantages
of professional management, portfolio diversification, daily liquidity,
principal stability and current income. There is no assurance that the Fund will
achieve its investment objective or be able to maintain a constant net asset
value. See "The Fund and Its Objective and Policies."
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. The Fund seeks to maintain a constant net asset value of $1.00 per
share and declares dividends daily.
The investment adviser of the Fund is RNC Capital Management Co. (the
"Investment Adviser").
Shares of the Fund are sold at their net asset value with no sales load.
The minimum initial purchase for shares of the Fund is $1,000 ($250 for
individual retirement accounts) and the minimum subsequent purchase is $100. See
"Purchase of Shares," page 8.
This Prospectus sets forth basic information about the Fund that a
prospective investor should know before investing in the Fund. Investors should
read and retain this Prospectus for future reference. Additional information
about the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information dated February 1, 1996 , as may be amended
from time to time, which is available upon request and without charge, and which
is incorporated herein by reference. Investors and prospective investors may
obtain a copy of the Statement of Additional Information by writing to the Fund
at the address given above. Inquiries regarding the Fund can be made by calling
(800) 877-7624.
TABLE OF CONTENTS
Page
----
Expense Information................................................. 2
Financial Highlights................................................ 3
The Fund and Its Objective and Policies............................. 4
Management.......................................................... 7
Purchase of Shares.................................................. 8
Net Asset Value..................................................... 9
Redemption of Shares............................................... 10
Dividends, Distributions and Taxes.................................. 11
Portfolio Transactions.............................................. 12
Investor Services................................................... 12
Shareholder Servicing and Marketing Plans........................... 13
Additional Information.............................................. 14
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this Prospectus is February 1, 1996
<PAGE>
EXPENSE INFORMATION
The following tables set forth certain information regarding shareholder
transaction expenses and annual Fund operating expenses.
Shareholder Transaction Expenses.......................................... None
Annual Fund Operating Expenses (as a percentage of net assets)
Management Fees (after fee reduction)................................ 0.28%
12b-1 Fees (after fee waiver)........................................ None
Other Expenses....................................................... 0.52%
Total Fund Operating Expenses...................................... 0.80%
====
Example
1 Year 3 Years 5 Years 10 Years
------ ------- -------- --------
You would pay the following expenses
on a $1,000 investment in the Fund,
assuming (1) a 5% annual return and
(2) redemption at the end of each time
period.................................. $8 $26 $44 $99
The purpose of the foregoing table is to assist the investor in
understanding the various costs and expenses that an investor in the Fund will
bear directly or indirectly. The Annual Fund Operating Expenses reflect actual
expenses for the fiscal year ended September 30, 1995. The amount of the
management fee reflects a voluntary fee reduction, which is anticipated to
continue for the current fiscal year. The 12b-1 fees represent a fee waiver of
0.25%, which is anticipated to continue for the current fiscal year. In the
absence of these reductions, the rate of management fee payable under the
Investment Advisory Agreement would be 0.41%, the 12b-1 fee would be 0.25% and
the Total Fund Operating Expenses would be 1.18% at the Fund's current asset
level. In addition to this fee reduction, the Investment Adviser may absorb
certain Fund expenses to lower the Fund's operating costs. See the Sections of
the Prospectus entitled "Investor Services" and "Management" for more complete
descriptions of the various costs and expenses referred to above. The example
set forth above should not be considered a representation of past or future
expenses, and actual expenses may be greater or less than those shown.
* * *
<PAGE>
FINANCIAL HIGHLIGHTS
(For One Share Outstanding Through Period)
The following financial highlights are for a share outstanding throughout
the period from May 12, 1986, the date on which the Fund's operations commenced,
through September 30, 1995. The information for the five years ended September
30, 1995 has been audited by Tait, Weller & Baker, the Fund's independent
certified public accountants, whose unqualified report thereon and other
financial statements of the Fund are incorporated by reference in the Statement
of Additional Information. This information should be read in conjunction with
the financial statements in the Fund's Annual Report to Shareholders, copies of
which may be obtained at no charge by writing or telephoning the Fund at the
address or telephone number appearing on the front page of this Prospectus.
<TABLE>
<CAPTION>
Fiscal Period Ended September 30, May 12,
---------------------------------------------------------------------- 1986
to
Sept. 30,
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
------ ------ ------ ------ ------ ------ ------ ------ ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning
of year.................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
INCOME FROM INVESTMENT
OPERATIONS
Net investment income 0.050 .032 .026 .038 .064 .077 .085 .066 .056 .022
LESS DISTRIBUTIONS
Dividends from net
investment income...... (0.050) (.032) (.026) (.038) (.064) (.077) (.085) (.066) (.056) (.022)
------- ------ ------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end
of year.................... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Return................. 5.10% 3.20% 2.65% 3.83% 6.34% 7.63% 8.82% 6.60% 5.60% 5.60% *
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
RATIOS/SUPPLEMENTAL
DATA
Net assets, end of
period (in 000's)...... 31,066 43,686 29,257 46,563 66,857 119,632 103,626 99,352 88,166 9,956
Ratio of expenses, net
of reimbursement, to
average net assets:.... 0.8% 0.7% 0.7% 0.8% 0.9% 0.8% 0.7% 0.8% 0.7% 0.0%
Ratio of net investment
income to average net
assets:................ 5.0% 3.2% 2.6% 3.9% 6.4% 7.7% 8.5% 6.6% 0.0% 5.6%*
*annualized
</TABLE>
3
<PAGE>
THE FUND AND ITS OBJECTIVE AND POLICIES
The investment objective of the Fund is to obtain as high as possible
current income consistent with preservation of capital and liquidity by
investing in a diversified portfolio of high-quality, short-term money market
securities which the Fund's Board of Directors determines present minimal credit
risks. This is a fundamental policy of the Fund, which may not be changed
without the approval of a majority of the Fund's outstanding voting securities.
For purposes of its investment policies, the Fund defines short-term money
market securities as securities having a maturity of up to one year. These
securities will consist primarily (i.e., in excess of 90% of the Fund's net
assets) of short-term securities issued by the U.S. Government and government
agencies, bank certificates of deposit, commercial paper, bankers' acceptances
and repurchase agreements. There can be no assurance that the objective of the
Fund will be realized.
The Fund will not invest more than 5% of its assets in the securities of
any one issuer (other than the U.S. Government, its agencies or
instrumentalities), or in the event that such securities are not rated in the
highest short-term rating category by any one nationally recognized statistical
rating organization ("NRSRO"), not invest more than the greater of $1 million or
1% of its total assets in the securities of any one issuer. In addition, not
more than 5% of the Fund's total assets will be invested in securities that are
not rated in the highest short-term rating category by any NRSRO or, if unrated,
are not of comparable quality to securities with the highest rating as
determined by the Fund's Board of Directors. With respect to the Fund's entire
portfolio, the Fund shall not maintain a dollar-weighted average portfolio
maturity which exceeds 90 days and will invest only in U.S. dollar-denominated
securities.
The following is a description of the types of short-term money market
securities in which the Fund may invest:
United States Government Securities. The Fund may invest in marketable
securities having remaining maturities of less than one year issued by or
guaranteed as to principal and interest by the U.S. Government, and supported by
the full faith and credit of the U.S. Government. Securities issued by the U.S.
Government include three varieties of Treasury Securities, which differ in their
interest rates, maturities and times of issuance: Treasury Bills, which have a
maturity at time of issuance of one year or less; Treasury Notes, which have
initial maturities of one to ten years; and Treasury Bonds, which generally have
initial maturities of greater than ten years.
Government Agency Securities. The Fund may invest in debt securities
issued by agencies of the U.S. Government which are not direct obligations of
the U.S. Treasury but are issued, in general, under the authority of an act of
Congress. Some of these securities, such as Government National Mortgage
Association pass-through certificates ("GNMA certificates"), are supported by
the full faith and credit of the U.S. Treasury; others, such as those of the
Federal Home Loan Bank, by the right of the issuer to borrow from the Treasury;
others, such as those issued by the Federal National Mortgage Association, by
discretionary authority of the U.S. Government to purchase certain obligations
of the agency; and others, such as those issued by the Student Loan Marketing
Association, only by the credit of the agency.
4
<PAGE>
Bank Money Instruments. The Fund may invest in obligations of depository
institutions having assets, as most recently publicly reported, of at least $500
million, such as negotiable certificates of deposit, variable rate certificates
of deposit, certain time deposits and bankers' acceptances. If the demand period
of any variable rate certificate of deposit is greater than seven days, there
shall be a presumption that the security is an illiquid security. This
presumption may be overcome, however, if the Board of Directors, in its
reasonable business judgment, determines that the security is not an illiquid
security. As discussed under the caption "Investment Restrictions," below, the
Fund has adopted certain policies limiting the extent to which it may make
certain of these investments. Such obligations may include U.S.
dollar-denominated obligations issued by foreign branches of U.S. banks or U.S.
branches of foreign banks. Foreign branches of U.S. banks may be subject to less
stringent reserve requirements than U.S. banks. Investments in securities of
such foreign branches are subject to the risk of imposition of exchange control
regulations, which could impair the liquidity of the investments.
Commercial Paper. The Fund may invest in commercial paper, which refers to
short-term, unsecured promissory notes issued by U.S. and foreign corporations
to finance short-term credit needs, rated at the time of purchase in the top
rating category as determined by the requisite number of NRSROs or of
"comparable quality" as determined by the Board of Directors if unrated. For
additional information regarding various corporate debt ratings, see the
Statement of Additional Information under the caption "Appendix -- Description
of Commercial Paper Ratings."
Corporate Bonds. The Fund may invest in bonds issued by U.S. corporations
maturing within one year from the date of purchase and at the time of purchase
rated in the highest short-term rating, that is Prime-1 by Moody's Investors
Service and A-1 by Standard & Poor's Corporation, and also rated at time of
purchase A or better by Moody's Investors Service or A or better by Standard &
Poor's Corporation. For additional information regarding various corporate debt
ratings, see the Statement of Additional Information under the caption "Appendix
- -- Description of Commercial Paper Ratings."
Reverse Repurchase Agreements. The Fund may invest in repurchase
agreements with member banks of the Federal Reserve System or approved dealers
in U.S. Treasury Securities. The Fund's ability to use reverse repurchase
agreements is limited by investment restrictions which may not be changed
without approval of a majority of the Fund's outstanding voting securities. The
Fund does not intend to have more than 20% of its net assets committed to
repurchase agreements, nor to invest more than 10% of its net assets in
repurchase agreements having maturities greater than seven days (together with
other illiquid securities). At all times during the term of any repurchase or
reverse repurchase agreement, the Fund's position will be fully collateralized
with U.S. Government or U.S. Government agency securities.
For purposes of the Investment Company Act of 1940, a repurchase agreement
is deemed to be a loan from the Fund to the seller of the security subject to
the repurchase agreement. It is not clear whether a court would consider the
security acquired by the Fund subject to a repurchase agreement as being owned
by the Fund or as being collateral for a loan by the Fund to the seller. In the
event of the commencement of bankruptcy or insolvency proceedings with respect
to the seller of the security before its repurchase under a repurchase
agreement, the Fund may encounter delays and incur costs before being able
5
<PAGE>
to sell the security. Delays may involve loss of interest or a decline in price
of the security. If a court characterizes such a transaction as a loan and the
Fund has not perfected a security interest in the security, the Fund may be
required to return the security to the seller's estate and be treated as an
unsecured creditor of the seller. As an unsecured creditor, the Fund would be at
risk of losing some or all of the principal and income involved in the
transaction. As with any unsecured debt instrument purchased for the Fund, the
Investment Adviser seeks to minimize the risk of loss through repurchase
agreements by analyzing the creditworthiness of the obligor, in this case, the
seller of the security. The repurchase agreements to be entered into by the Fund
will usually be for short periods, such as under one week.
Apart from the risk of bankruptcy or insolvency proceedings, there is also
the risk that the seller may fail to repurchase the security. However, the Fund
will always receive as collateral for any repurchase agreement to which it is a
party securities acceptable to it. The market value of the collateral is equal
to at least 100% for U.S. Government securities and 102% for U.S. Government
agency securities of the amount invested by the Fund plus accrued interest, and
the Fund will make payment against such securities only upon physical delivery
or evidence of book entry transfer to the account of its custodian (the
"Custodian"). If the market value of the security subject to the repurchase
agreement becomes less than the repurchase price (including interest), the Fund
will, pursuant to its repurchase agreement, require the seller of the security
to deliver additional securities so that the market value of all securities
subject to the repurchase agreement will at all times equal or exceed the
amounts referred to above.
Variable Amount Master Notes. The Fund may also purchase variable amount
master notes issued by U.S. and foreign companies having an outstanding debt
issue at the time of purchase rated AA or better by Standard & Poor's
Corporation or Aa or better by Moody's Investors Service. Variable amount master
notes are obligations that permit the short-term investment of fluctuating
amounts by the Fund at varying market rates of interest pursuant to direct
arrangements between the Fund, as lender, and the borrower. Because variable
amount master notes are direct lending arrangements between the lender and
borrower, the parties to the transaction generally do not contemplate that such
instruments will be traded, and there is no secondary market for the notes.
Accordingly, because of the illiquid nature of the notes, the Fund's investment
in such notes and other illiquid investments (such as repurchase agreements
having maturities greater than seven days) may not exceed 10% of its net assets.
Forward Commitments. The Fund may purchase money market securities on a
forward commitment based on fixed terms. The Fund does not intend to invest more
than 5% of its assets in such forward commitments.
Foreign Securities. The Fund is authorized to invest in securities of
foreign issuers of the types referred to above but has no current intention to
make any such investments.
$1.00 Per Share Price. The Fund seeks to maintain a net asset value of
$1.00 per share for purchases and redemptions. There can be no assurance,
however, that the Fund will be able to maintain a net asset value of $1.00 per
share.
Investment Restrictions. The Fund has adopted certain restrictions and
policies relating to the investment of its assets and other activities which are
fundamental policies of
6
<PAGE>
the Fund and may not be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. Among the more significant
policies and restrictions, the Fund may not (1) purchase any securities other
than the types of money market securities and investments described under the
section of this Prospectus entitled "The Fund and Its Objective and Policies";
(2) invest more than 25% of its total assets in the securities of issuers in any
particular industry (other than U.S. Government securities, Government agency
securities or money market instruments issued by U.S. branches of banks located
in the United States); (3) purchase the securities of any one issuer, other than
the U.S. Government and U.S. Government agency securities, if immediately after
such purchase more than 5% of the value of its assets would be invested in such
issuer; (4) invest in securities having contractual restrictions on resale,
repurchase agreements or non-negotiable time deposits having more than seven
days to maturity or other illiquid securities if such investment would result in
the Fund having more than 10% of the value of its net assets invested in such
securities or repurchase agreements; or (5) borrow, except for temporary or
emergency purposes, and then only from banks in an amount not exceeding 10% of
the value of the total assets of the Fund.
Other restrictions and additional information on policies concerning such
portfolio strategies as investing in non-U.S. securities and lending portfolio
securities are set forth in the Statement of Additional Information under the
caption "The Fund and Its Objective and Policies -- Investment Restrictions."
MANAGEMENT
Advisory Services. The Fund's investment adviser, RNC Capital Management
Co., is responsible for providing investment advice to the Fund. As compensation
for its services to the Fund, the Fund pays the Investment Adviser a fee at a
maximum annual rate of 0.41% of the Fund's average daily net assets. From time
to time, the Investment Adviser may voluntarily waive all or a portion of its
fees payable by the Fund and may also absorb certain Fund expenses. This will
have the effect of lowering the overall expense ratio of the Fund and increasing
the Fund's yield or return to Fund investors while the fee waiver is in effect.
As further discussed in the Statement of Additional Information, the Investment
Adviser's fee is also subject to reduction to the extent that the operating
expenses of the Fund exceed the expense limitations applicable to the Fund
imposed by any state securities law or any regulations thereunder. See the
Statement of Additional Information under the caption "Investment Advisory and
Other Services."
The Investment Adviser and its affiliates have been in the business of
providing investment advice to taxable and tax-exempt accounts for over 25
years, and the Investment Adviser currently manages approximately $890 million
in assets on behalf of its clients. The Investment Adviser is a wholly owned
subsidiary of RNC Capital Group, Inc., which is in the business of providing
financial services to institutional and individual investors through its
subsidiaries. RNC Capital Group, Inc. is an indirect subsidiary of Bank Austria
Aktiengesellschaft (the "Bank"), a banking organization which is organized under
the laws of and domiciled in the Republic of Austria.
Anteilsverwaltung-Zentralsparkasse owns a majority of the voting securities of
the Bank, and the Republic of Austria and Wiener Stadtische each own more than
5% of the voting securities of the Bank. No other single entity owns more than
5% of the issued and outstanding stock of the Bank.
7
<PAGE>
Administration Agreement. The Fund has also entered into an Administration
Agreement with Investment Company Administration Corporation ("ICAC" or the
"Administrator") under which ICAC provides the Fund with certain services in
connection with the management of the Fund's operations. These services include
supervising the Fund's operations; providing the Fund with officers;
coordinating the preparation of reports and other materials; and other
functions. ICAC is affiliated with the Fund's Principal Underwriter (see below).
As compensation for providing these services, the Fund pays ICAC a fee at a
maximum annual rate of $60,000, payable monthly.
Board of Directors. The Fund has a Board of Directors, which establishes
the Fund's policies and supervises and reviews the management of the Fund. The
day-to-day operations of the Fund are the responsibility of the officers of the
Fund, who are appointed by the Board of Directors, and, respectively, the Fund's
Administrator and its Investment Adviser, who are each subject to the general
supervision of the Fund's Board of Directors pursuant to the terms of the
Investment Advisory Agreement.
PURCHASE OF SHARES
Shares of the Fund may be purchased directly from the Fund through the
Fund's transfer agent (the "Transfer Agent"), or through First Fund
Distributors, Inc. (the "Principal Underwriter"), whose address is 4455 East
Camelback Road, Suite 261E, Phoenix, Arizona 85018, or from securities dealers
who have entered into a Selected Dealers Agreement with the Principal
Underwriter.
The public offering price is the net asset value per share, which is
expected to remain constant at $1.00 per share. There can be no assurance,
however, that the Fund will be able to maintain a net asset value of $1.00 per
share. See the Section of this Prospectus entitled "Net Asset Value." The
minimum initial purchase in the Fund is $1,000 ($250 for individual retirement
accounts). The minimum subsequent purchase is $100.
How to Buy Shares. To purchase shares directly from the Fund, investors
must complete and sign the attached Account Application and pay for the shares
purchased. Corporations, trusts or associations may be required to provide
additional information.
Shares may be purchased by mail or by wire.
Purchase by Mail. Send a check or Federal Reserve draft for the purchase
price by mail to RNC Liquid Assets Fund, Inc., c/o American Data Services, Inc.,
P. O. Box 1131, Cincinnati, Ohio, 45264-1131, and, in the case of a new account,
a completed Account Application. Checks and Federal Reserve drafts should be
made payable to "RNC Liquid Assets Fund, Inc." Certified checks are not
necessary, but checks are accepted subject to collection at full face value in
United States Dollars and must be drawn on a bank located in the United States.
Investors purchasing shares by check will not receive payment upon redemption of
such shares until the Fund is reasonably satisfied that the investment has been
collected (which may take up to 15 days). If the Fund is unable to collect upon
the full face value of an investor's check, the purchase order will be canceled
and the investor or the dealer through which the shares are purchased will be
liable for any losses or fees incurred.
Purchase by Wire. Purchases by wire are normally used for large purchases
(purchases of $100,000 or more). You may use a bank or Federal Funds wire. Your
bank
8
<PAGE>
will probably charge you for the wire. Federal Funds are monies credited to a
bank's account with a Federal Reserve Bank. To purchase shares of the Fund by
wire, the investor must have an application on file and must telephone the
Transfer Agent, at (800) 385-7003, to receive a wire order number. The initial
purchase by an investor may be made by wire provided that the investor has an
application on file. On the telephone the following information will be
requested by the Transfer Agent: name(s) in which the account is registered,
account number, amount being wired and wiring bank. Instructions should then be
given by the investor to its bank to wire the specified amount, along with the
account name(s) and number and Wire Order Number, to:
Star Bank, N.A. CINTI/TRUST
ABA # 0420-0001-3
DDA # 483897690
For Account: 19-7200 RNC Liquid Assets Fund, Inc.
Investing through Securities Dealers. Investors may purchase shares of the
Fund from the Principal Underwriter or securities dealers who have entered into
a Selected Dealers Agreement with the Principal Underwriter. Investors should
contact their securities dealer directly for appropriate instructions, as well
as information pertaining to accounts and any related fees. Purchase orders
through securities dealers are effected at the net asset value next determined
after receipt of the order by such dealer, and it is the responsibility of the
securities dealer to transmit orders on a timely basis to the Fund's Transfer
Agent.
General. All monies will be fully invested in full and fractional shares
of the Fund on the day the order is placed with the Transfer Agent, receiving
the dividend and net asset value determined on that day, provided the order and
good payment in respect of the order are received by the Transfer Agent prior to
2:00 p.m., Eastern time, on that day. The issuance of shares is recorded on the
books of the Fund, and, to avoid additional operating costs and for investor
convenience, stock certificates are not issued unless expressly requested of the
Transfer Agent in writing by a shareholder. If requested, stock certificates are
issued at no charge to shareholders. Certificates are not issued for fractional
shares. The Transfer Agent sends to each shareholder of record a statement of
shares of the Fund owned after each purchase or redemption transaction relating
to such shareholder. Any order may be rejected by the Principal Underwriter or
the Fund. The Fund reserves the right to suspend the sale of its shares to the
public in response to conditions in securities markets, or otherwise.
Individual Retirement Account. An investor may establish an individual
retirement account with the Fund's Custodian and purchase shares in the Fund
through such individual retirement account. The minimum initial investment in
the Fund for such an account is $250. Additional information regarding
establishment of such an account may be obtained by contacting the Fund or the
Principal Underwriter.
NET ASSET VALUE
The net asset value per share of the Fund is determined as of 4:00 p.m.,
Eastern time, (Monday through Friday) on each business day the New York Stock
Exchange ("NYSE") is open for trading. The net asset value per share is computed
by dividing the value of the net assets of the Fund by the total number of
shares outstanding, rounded to the nearest cent. The Fund uses the amortized
cost method of valuing its portfolio securities. Expenses, including the
investment advisory fees payable to the Investment Adviser, are accrued daily.
9
<PAGE>
REDEMPTION OF SHARES
Shareholders have the right to require the Fund to redeem their shares
upon receipt of a written request in proper form, by check or by wire. The
redemption price is the net asset value per share of the Fund next determined
after the initial receipt of proper notice of redemption by the Fund's Transfer
Agent.
Ordinary Redemption Procedure. A shareholder wishing to redeem shares of
the Fund may do so without charge by tendering a written request for redemption
in proper form, as explained below, directly to the Transfer Agent, American
Data Services, Inc., (RNC Liquid Assets Fund, Inc.), 24 West Carver Street, 2nd
Floor, Huntington, New York, 11743, together with the stock certificates, if
any, issued for such shares. To be in proper form, the redemption request
requires the signature(s) of all persons in whose name(s) the shares are
registered, signed exactly as their name(s) appear on the Transfer Agent's
register or on the stock certificate(s), as the case may be. In addition, the
signatures on the notice must be guaranteed by an eligible financial
institution, such as a commercial bank, a savings association, a trust company
or a member firm of a national or regional securities exchange. A notary public
is not an acceptable guarantor. In certain instances, the Transfer Agent may
require additional documents such as, but not limited to, trust instruments,
death certificates, appointments as executor or administrator, or certificates
of corporate authority. For shareholders redeeming their shares directly with
the Transfer Agent, payment will be mailed within seven days of receipt of a
proper notice of redemption.
At various times, the Fund may be requested to redeem shares for which it
has not yet received good payment. The Fund may delay or cause to be delayed the
mailing of a redemption check for a period of up to 15 days until it is assured
that good payment (i.e., cash or a certified check drawn against an account
maintained in a bank located in the United States) has been collected for the
purchase of such shares.
The Fund may, at its option, compel the redemption of a shareholder's
shares if the value of the shareholder's account falls below $750 ($250 for
individual retirement accounts) as the result of shareholder redemptions. A
shareholder will receive 60 days' written notice before mandatory redemption
occurs, during which time the shareholder will have the right to increase his or
her account above $750 ($250 for individual retirement accounts).
Redemption by Check. The Transfer Agent will establish a checking account
for any shareholder at the shareholder's written request. Checks drawn on this
account can be made payable to the order of any person in any amount not less
than $500. The payee of the check may cash or deposit the check like any other
check drawn on a bank. When such a check is presented to the Transfer Agent for
payment, the Transfer Agent will present the check to the Fund as authority to
redeem a sufficient number of shares in the shareholder's account to cover the
amount of the check. This enables the shareholder to continue earning daily
income dividends until the check is cleared. The Transfer Agent will return
canceled checks to the shareholder.
Shareholders are subject to the Transfer Agent's rules and regulations
governing such checking accounts, including the right of the Transfer Agent not
to honor checks in amounts exceeding the value of the shareholder's account at
the time the check is presented for payment. Also, the Transfer Agent may not
honor checks drawn against shares purchased,
10
<PAGE>
other than by Federal Funds wire or bank wire, until 15 days after the purchase
of such shares.
Redemption by Wire. Shareholders may have redemption proceeds wired to a
bank account if the shareholder has checked the appropriate box on the Fund's
Account Application, and filed a Telephone Authorization Form with the Transfer
Agent. Redemption requests may be made by telephone or letter and, if received
by the Transfer Agent by 2:00 p.m., Eastern time, the proceeds will be wired on
the same day. Requests received after 2:00 p.m. will be wired on the next
business day after the redemption request is received. The Fund reserves the
right to refuse any redemption request made by telephone, in which case ordinary
redemption procedures should be used. The minimum amount which may be wired is
$1,000. The Fund may limit the frequency of telephone redemptions. Shares in
certificate form may not be redeemed by check or wire.
The Transfer Agent and the Fund have reserved the right to modify or
terminate the privileges of redemption by check or wire and disclaim any
responsibility for any unauthorized redemptions by telephone.
Repurchase. The Fund will also repurchase shares of the Fund from a
shareholder through the securities dealer from which the shareholder originally
purchased shares. The Fund will normally accept orders to repurchase shares by
wire or telephone, from dealers for their customers at the net asset value next
computed after receipt of the order by the dealer, provided that the request for
repurchase is received by the securities dealer prior to the close of business
on the NYSE on the day received and is received by the Fund from such dealer not
later than 2:00 p.m., Eastern time, on the same day. Dealers have the
responsibility of submitting such repurchase requests to the Fund not later than
2:00 p.m., Eastern time, in order to obtain that day's closing price. These
repurchase arrangements are for the convenience of shareholders and do not
involve a charge by the Fund; however, securities dealers may impose a charge on
the shareholder for transmitting the notice of repurchase to the Fund. The Fund
reserves the right to reject any order for repurchase. The exercise of such
right of rejection might adversely affect shareholders seeking to sell their
shares through the repurchase procedure. If, however, a "repurchase order" is
accompanied by a tender of share certificates, the order will be deemed to be a
redemption request. Redemption requests may not be rejected by the Fund and
therefore provide an alternative means for shareholders whose repurchase orders
are rejected to sell their shares.
For shareholders requesting repurchases through their listed securities
dealer, payment for shares will be made by the Transfer Agent directly to the
shareholder or dealer within seven days of the proper tender of the
certificates, if any, and a stock power or letter requesting redemption, in each
instance with signatures guaranteed as noted above.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions. The Fund's policy is to declare dividends
from net income daily and to pay them monthly. Long-term capital gains are
currently declared and paid annually after the end of the fiscal year in which
they have been earned; distributions of any realized securities gains are made
by December 31 of each year with respect to the twelve-month period ending on
October 31 of such year. Dividends begin accruing the day shares are purchased
or credited to a shareholder's account. All dividends and distributions are
automatically reinvested in additional full and fractional Fund shares at the
net asset value
11
<PAGE>
next determined after payment of the dividend or distribution and credited to
the share-holder's account or, at the shareholder's option, paid in cash. If a
shareholder elects to receive distributions in cash, such payments will be made
monthly. All expenses are accrued daily and deducted before declaration of
dividends to investors. See the section of this Prospectus entitled "Investor
Services -- Reinvestment of Dividends and Capital Gains Distributions" for
information as to how to elect either dividend reinvestment or cash payments.
Taxes. The Fund has qualified and elected, and intends to continue to
qualify, to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code of 1986, as amended. Under such provisions, the Fund
will not be subject to federal income tax on such part of its net ordinary
income and net realized capital gains which it distributes to its shareholders.
Dividends and distributions are taxable to shareholders and subject to
federal income tax whether they are reinvested in additional Fund shares or
received in cash. Shareholders not subject to federal income tax on their income
generally will not be required to pay taxes on amounts being distributed to
them. Dividends and capital gain distributions may also be subject to state and
local taxes. Shareholders are urged to consult their own tax counsel or other
tax advisers regarding specific questions as to federal, state or local taxes.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to execute any transactions in the Fund's
portfolio securities through any dealer or group of dealers. Subject to policy
established by the Directors of the Fund, the Investment Adviser is primarily
responsible for the portfolio decisions of the Fund and the placing of the
Fund's portfolio transactions. In placing orders, the policy of the Fund is to
obtain the best execution so that the resultant price to the Fund is as
favorable as possible under prevailing market conditions. Factors which may be
considered include the price of the security being offered (including the
applicable dealer spread), the size, type and difficulty of the transaction
involved, the firm's general execution and operational facilities, the risk in
position in the securities involved and, where such transactions are executed
with brokers on an agency basis, the provision of supplemental investment
research, market and statistical information and other research services and
products. While the Investment Adviser generally seeks reasonably competitive
spreads or commissions, the Fund may not necessarily pay the lowest spread or
commission available.
INVESTOR SERVICES
The Fund offers a number of services to its shareholders which are
designed to facilitate investment in its shares at no extra cost. A description
of such services is set forth below. Full details as to each such service and
copies of the various plans described below can be obtained from the Fund.
Investment Account. Every shareholder has an investment account and
receives transaction reports from the Transfer Agent after each share
transaction and dividend reinvestment. After the end of each year, each
shareholder receives federal income tax information regarding dividends and
capital gains distributions.
Automatic Investment Plan. A shareholder may make additions to his or her
investment account at any time by purchasing shares at the applicable purchase
price either
12
<PAGE>
through a securities dealer who has entered into a Selected Dealers Agreement
with the Principal Underwriter or by mail directly to the Transfer Agent.
Voluntary accumulation can also be made through a service known as the Automatic
Investment Plan whereby the Transfer Agent is authorized through pre-authorized
checks of $50 or more to charge the regular bank account of the shareholder on a
monthly basis to provide systematic additions to the investment account of such
shareholder.
Reinvestment of Dividends and Capital Gains Distributions. Unless specific
instructions are given on the Account Application form as to the method of
payment of dividends and capital gains distributions, such payments are
automatically reinvested in additional shares of the Fund. Reinvestment of
dividends and capital gains distributions is calculated at the net asset value
of the shares of the Fund as of the close of business on the day on which the
dividend or distribution is paid. Shareholders may elect in writing to receive
either their dividends or capital gains distributions, or both, in cash, in
which event payment is mailed by the Transfer Agent within seven days after the
payment date.
A shareholder may, at any time, notify the Transfer Agent in writing that
the shareholder no longer wishes to have his or her dividends and/or capital
gains distributions reinvested in shares or vice versa and, immediately upon the
receipt by the Transfer Agent of such notice, those instructions will be
effected.
Systematic Withdrawal Plan. Quarterly or monthly withdrawals from the Fund
are available for shareholders who have acquired shares having a value, based
upon the current offering price, of $10,000 or more.
At the time of each withdrawal payment, sufficient shares are redeemed
from those on deposit in the shareholder's account to provide the withdrawal
payment specified by the shareholder. The shareholder may specify either a
dollar amount or a percentage of the value of his or her shares. Redemptions are
made at net asset value as determined at the close of business on the NYSE on
the 25th day of the last month of each quarter in the case of quarterly
distributions and on the 25th day of the month in the case of monthly
distributions. If the NYSE is not open for business on such date, the shares are
redeemed at the close of business on the preceding business day. The check for
the withdrawal payment is mailed on the next business day following redemption.
If and when a shareholder is making systematic withdrawals, dividends and
distributions on all shares in the Investment Account are automatically
reinvested in shares of the Fund. A shareholder's Systematic Withdrawal Plan may
be terminated at any time, without charge or penalty, by the shareholder, the
Fund, the Transfer Agent or the Principal Underwriter.
Withdrawal payments should not be considered as dividends, yield or
income. Each withdrawal is a potentially taxable event. If periodic withdrawals
continuously exceed reinvested dividends, the shareholder's original investment
may be correspondingly reduced.
SHAREHOLDER SERVICING AND MARKETING PLANS
The Fund has adopted two plans pursuant to Rule 12b-1 promulgated under
the 1940 Act, a Shareholder Servicing Plan for the provision of shareholder
services and a Marketing Plan to reimburse the Administrator for the costs of
printing prospectuses and other promotional activities.
13
<PAGE>
The Shareholder Servicing Plan between the Fund and Midvale Securities
Corporation ("Midvale"), an affiliate of the Investment Adviser, provides that
Midvale will be reimbursed by the Fund for the actual expenses incurred by
Midvale or a sub-agent in furnishing the Fund with services which include: (i)
sending periodic information to service organizations that track investment
company information; (ii) answering shareholder inquiries regarding shareholder
account status and history; (iii) collecting information from shareholders
regarding changes in option and account designation and addresses and
transmitting the same to the Transfer Agent; (iv) collecting the same type of
information from independent account executives and brokers and transmitting it
to the Transfer Agent; (v) supplying other information to the Transfer Agent so
that the Transfer Agent can properly maintain shareholder account records; (vi)
providing facilities, equipment and personnel in connection with the provision
of such services; and (vii) performing such additional shareholder services as
may be agreed upon by the Fund and Midvale, which shall be approved in
accordance with the 1940 Act, provided that any such additional shareholder
services constitute a permissible non-banking activity. Under the Shareholder
Servicing Plan, the Fund will reimburse the actual expenses incurred by Midvale
up to a maximum annual rate, equal to 0.25% of the Fund's average daily net
assets, accrued daily and paid monthly.
The Marketing Plan between the Fund and its Administrator provides that
the Administrator will be reimbursed by the Fund for its costs incurred in
connection with, among other things, the printing, distribution and mailing of
advertisements, brochures, other sales materials, prospectuses, statements of
additional information, and annual and semi-annual reports to potential
investors and selected dealers and the filing of such materials with appropriate
securities regulatory authorities. The Marketing Plan provides that
reimbursements must be limited to actual costs incurred by the Administrator, as
the marketing agent, subject to a maximum reimbursement of 0.03% of the Fund's
average daily net assets.
Both the Shareholder Servicing Plan and the Marketing Plan provide that
all reimbursements shall be accounted for within the fiscal year of the Fund in
which such expenditures were made and will not be carried forward into
subsequent fiscal years of the Fund. Both the Shareholder Servicing Plan and the
Marketing Plan contain reporting, renewal, termination and amendment provisions
as required by the 1940 Act. See the Statement of Additional Information section
entitled "Shareholder Servicing Plan and Marketing Plan" for more information.
Banking Law. The Glass-Steagall Act prohibits banks and their affiliates
from engaging in certain securities-related activities, including the offering,
sale or distribution of securities. None of the service providers to the Fund
believes that the services which it provides the Fund violate the Glass-Steagall
Act or any other applicable banking statute or regulation. However, future
changes in federal or state statutes or regulations or in judicial or
administrative interpretations of present or future statutes or regulations
might prevent certain of the Fund's service providers from performing their
duties under the applicable agreement. If such a change should occur, the Fund's
Board of Directors will consider appropriate action, including the possible
retention of another service provider.
14
<PAGE>
ADDITIONAL INFORMATION
Yield Calculations. From time to time, the Fund advertises its "yield" and
"effective yield." Both yield figures are based on historical earnings and are
not intended to indicate future performance. The "yield" of the Fund refers to
the income generated by an investment in the Fund over a seven-day period (which
period will be stated in the advertisement). This income is then "annualized."
That is, the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. The "effective yield" is calculated similarly but,
when annualized, the income earned by an investment in the Fund is assumed to be
reinvested. The "effective yield" will be slightly higher than the "yield"
because of the compounding effect of this assumed reinvestment.
Description of Shares. The authorized capital stock of the Fund consists
solely of 500,000,000 shares of Common Stock having a par value of $0.01 per
share. Each of the Fund's issued and outstanding shares has equal dividend,
distribution, liquidation and voting rights. Each issued and outstanding share
is entitled to one vote and is entitled to participate equally in dividends and
distributions declared by the Fund and in net assets of the Fund remaining after
satisfaction of outstanding liabilities upon liquidation or dissolution. The
shares of the Fund, when issued, are fully paid and non-assessable, have no
preference, preemptive, conversion, exchange or similar rights, and are freely
transferable. Shares do not have cumulative voting rights and the holders of
more than 50% of the shares of the Fund voting for the election of Directors can
elect all of the Directors of the Fund if they choose to do so, and in such
event the holders of the remaining shares would not be able to elect any
Directors. The Fund does not normally hold annual meetings of shareholders
except when required by the 1940 Act. See the Statement of Additional
Information section entitled "Management of the Fund" for more information.
Custodian and Dividend Disbursing Agent. Star Bank is the Fund's
Custodian.
Transfer and Dividend Disbursing Agent. American Data Services, Inc. is
the Fund's Transfer Agent, Dividend Disbursing Agent, and maintains the Fund's
accounting records.
Counsel and Auditor. The validity of the shares of beneficial interest
offered by this Prospectus will be passed on by Heller, Ehrman, White &
McAuliffe. Tait, Weller & Baker, independent certified public accountants, are
the auditors of the Fund.
Miscellaneous. The Fund issues to its shareholders semi-annual reports
containing unaudited financial statements and annual reports containing
financial statements examined by auditors approved annually by the Board of
Directors.
This Prospectus does not contain all the information included in the
Registration Statement with the Securities and Exchange Commission under the
Securities Act of 1933. Certain portions of the Fund's Registration Statement
have been omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. The Registration Statement, including the exhibits filed
therewith, may be examined at the office of the Securities and Exchange
Commission in Washington, D.C.
15
<PAGE>
No person has been authorized to give any information
or to make any representations, other than those
contained in this Prospectus and in the Statement of
Additional Information, in connection with the offer
made by this Prospectus, and, if given or made, such
other information or representations must not be
relied upon as having been authorized by the Fund,
its investment Adviser or its Principal Underwriter.
This Prospectus does not constitute an offer to sell
or a solicitation of an offer to buy by the Fund or
by the Principal Underwriter in any State in which
such offer to sell or solicitation of any offer to
buy may not lawfully be made.
INVESTMENT ADVISER
RNC Capital Management Co.
11601 Wilshire Boulevard
25th Floor
Los Angeles, California 90025
CUSTODIAN
Star Bank
P.O. Box 1118
Cincinnati, Ohio 45201-1118
TRANSFER AGENT
American Data Services, Inc.
24 West Carver Street, 2nd Floor
Huntington, New York 11743
LEGAL COUNSEL
Heller, Ehrman, White & McAuliffe
333 Bush Street
San Francisco, California 94104
AUDITORS
Tait, Weller & Baker
Two Penn Center Plaza
Philadelphia, PA 19102
<PAGE>
-----------------------------------
PART B
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
RNC LIQUID ASSETS FUND, INC.
11601 WILSHIRE BOULEVARD, 25TH FLOOR
LOS ANGELES, CALIFORNIA 90025
FOR GENERAL INFORMATION AND PURCHASES CALL
(800) 877-7624
RNC Liquid Assets Fund, Inc. (the "Fund") is a professionally
managed diversified open-end management investment company. The Fund invests in
a diversified portfolio of short-term money market securities with the objective
of obtaining as high as possible current income consistent with preservation of
capital and liquidity. Shares of the Fund may be purchased at their net asset
value with no sales load.
This Statement of Additional Information of the Fund is not a
prospectus and should be read in conjunction with the Prospectus of the Fund
dated February 1, 1996, as may be amended from time to time (the "Prospectus"),
which has been filed with the Securities and Exchange Commission and is
available upon written request without charge. The Prospectus provides the basic
information a prospective investor should know before purchasing shares of the
Fund and may be obtained by calling or by writing the Fund at the above
telephone number or address. This Statement of Additional Information is not a
prospectus and should be read in conjunction with the Prospectus. This Statement
of Additional Information has been incorporated by reference into the
Prospectus.
The date of this Statement of Additional Information is February 1,
1996.
TABLE OF CONTENTS
Page
----
The Fund and Its Objective and Policies.....................................B- 2
Management of the Fund......................................................B- 4
Investment Advisory and Other Services......................................B- 6
Portfolio Transactions......................................................B- 8
Purchase of Shares..........................................................B- 8
Redemption of Shares........................................................B- 9
Taxes.......................................................................B-10
Dividends...................................................................B-12
Shareholder Servicing Plan and Marketing Plan...............................B-13
Principal Underwriter.......................................................B-15
Financial Statements........................................................B-15
Appendix....................................................................B-16
B-1
<PAGE>
THE FUND AND ITS OBJECTIVE AND POLICIES
Reference is made to "The Fund and its Objective and Policies"
in the Prospectus for a discussion of the investment objectives and policies of
the Fund.
The Fund is a diversified open-end management company, which
was organized as a Maryland corporation on April 9, 1985.
INVESTMENT RESTRICTIONS. In addition to the investment restrictions set forth in
the Prospectus, the Fund has adopted the following eleven investment
restrictions, none of which may be changed without the approval of a majority of
the Fund's outstanding shares, which for this purpose means the vote of (i) 67%
or more of the Fund's shares present at a meeting, if the holders of more than
50% of the outstanding shares of the Fund are present or represented by proxy or
(ii) more than 50% of the Fund's outstanding shares, whichever is less. The Fund
may not:
(1) Make investments for the purpose of exercising control or
management.
(2) Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization.
(3) Invest in oil, gas or other mineral exploration or development
programs, commodities or commodity contracts, except that the Fund may
invest in securities of issuers which invest or deal in any of the
above.
(4) Invest in real estate or in interests in real estate, but the Fund
may purchase readily marketable securities of companies holding real
estate or interests therein.
(5) Purchase any securities on margin, except for use of short-term
credit necessary for clearance of purchases and sales of portfolio
securities.
(6) Make short sales of securities or maintain a short position or
write, purchase or sell puts, calls, straddles, spreads or combinations
thereof.
(7) Make loans to other persons, provided that (a) the Fund may
purchase debt obligations in accordance with its investment objective
and policies, (b) the Fund may make loans of portfolio securities
provided, among other things, that the value of the securities loaned
does not exceed 10% of the value of the Fund's net
B-2
<PAGE>
assets and (c) the Fund may enter into repurchase agreements as
disclosed in the Prospectus. (The Fund does not presently loan
portfolio securities.) The acquisition of bonds, debentures or other
corporate debt securities which are not publicly distributed is
considered to be the making of a loan under the Investment Company Act
of 1940 (the "1940 Act").
(8) Mortgage, pledge, hypothecate or in any manner transfer as security
for indebtedness any securities owned or held by the Fund except as may
be necessary in connection with borrowings mentioned in (9) below, and
then such mortgaging, pledging or hypothecating may not exceed 10% of
the Fund's total assets, taken at market value. In order to comply with
certain state statutes, the Fund will not, as a matter of operating
policy, mortgage, pledge or hypothecate its portfolio securities to the
extent that at any time the value of pledged securities will exceed 10%
of the net assets of the Fund.
(9) Borrow in excess of 10% of the total assets of the Fund, taken at
market value, and then only from banks as a temporary measure for
extraordinary or emergency purposes. Usually only "leveraged"
investment companies may borrow in excess of 5% of their assets;
however, the Fund will not borrow to increase income but only to meet
redemption requests which might otherwise require untimely dispositions
of portfolio securities. In addition, the Fund will not purchase
securities while borrowings are outstanding.
(10) Act as an underwriter of securities, except to the extent that the
Fund may technically be deemed an underwriter when engaged in the
activities described in (7) above or insofar as the Fund may be deemed
an underwriter under the Securities Act of 1933 in selling portfolio
securities.
(11) Invest in securities of any one issuer with a record of less than
three years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies.
Bank money instruments in which the Fund invests must be
issued by depository institutions with total assets of at least $500 million or
capital surplus and undivided profits in excess of $100 million.
The Fund's commercial paper investments will be rated at the
time of purchase in the top rating category as determined
B-3
<PAGE>
by the requisite number of nationally recognized statistical rating
organizations ("NRSROs") or be of "comparable quality" as determined by the
Board of Directors if unrated. The Fund's investments in corporate bonds (which
must have maturities at purchase of one year or less) must be rated at least
"AA" by Standard & Poor's Corporation ("Standard & Poor's") or "Aa" by Moody's
Investors Service ("Moody's"). For further information regarding various
corporate debt ratings, see the Appendix.
FORWARD COMMITMENTS. The Fund may purchase money market securities on a forward
commitment basis at fixed purchase terms. The purchase will be recorded on the
date the Fund enters into the commitment and the value of the security will
thereafter be reflected in the calculation of the Fund's net asset value. The
value of the security on the delivery date may be more or less than its purchase
price. A segregated account of the Fund will be established with its custodian
consisting of cash or liquid money market securities having a market value at
all times at least equal to the amount of the forward commitment.
FOREIGN SECURITIES. As noted in the Prospectus, the Fund may in the future
invest in securities of foreign issuers. Investments in foreign securities,
particularly those of non-governmental issuers, involve considerations which are
not ordinarily associated with investing in U.S. issuers. These considerations
include changes in currency rates, currency exchange control regulations, the
possibility of expropriation, the unavailability of financial information or the
difficulty of interpreting financial information prepared under foreign
accounting standards, less liquidity and more volatility in foreign securities
markets, the impact of political, social or diplomatic developments and the
difficulty of assessing economic trends in countries outside the United States.
If it should become necessary, the Fund could encounter greater difficulties in
invoking legal processes abroad than would be the case in the United States.
Transaction costs in foreign securities may be higher. These and other factors
will be considered before investing in foreign securities, unless such
investments will meet the Fund's standards and objectives. The Fund will not
concentrate its investments in any particular foreign country and will only
purchase securities denominated in U.S. Dollars.
MANAGEMENT OF THE FUND
The Board of Directors is responsible for the overall
management of the Fund, including general supervision and review of its
investment activities. None of the Fund's current Directors is an "interested
person" (as defined in the 1940 Act) of the Fund or any adviser, administrator
or principal underwriter of the Fund. The officers, who administer the Fund's
daily operations, are appointed by the Board of Directors. The
B-4
<PAGE>
current Directors and officers of the Fund, their addresses, and their principal
occupations for the past five years are set forth below.
ERIC M. BANHAZL -- President, Treasurer and Secretary of the
Fund, 2025 E. Financial Way, Suite 101, Glendora, California 91741: Currently,
Mr. Banhazl (age 38) is Senior Vice President of Robert H. Wadsworth &
Associates, Inc., Vice President of Investment Company Administration
Corporation, the Fund's administrator and First Fund Distributors, Inc., the
Fund's principal underwriter. Mr. Banhazl is also the President of E.M. Banhazl
& Associates, Inc., a mutual fund consulting firm, the Treasurer of
Professionally Managed Portfolios, an investment company unaffiliated with the
Fund, the Treasurer of Guinness Flight Investment Funds, Inc., an investment
company unaffiliated with the Fund, and President, Secretary and Treasurer of
Target Income Fund, Inc., an investment company unaffiliated with the Fund.
BRUCE B. STUART -- Director; 3198 C. Airport Loop, Costa Mesa,
California 92626. Since 1991, Mr. Stuart (age 53) has been the president of
Nu-Ceramic Technology, Inc., a company involved in the research and development
of advanced ceramic metallization for the semiconductor and hybrid industry.
From 1984 to 1991, Mr. Stuart was a partner of the Richmar Group, a management
consulting firm.
DEVERE W. McGUFFIN, II -- Director; 1441 East Chevy Chase,
Glendale, California 91206. Mr. McGuffin (age 52) is the owner and principal
executive officer of the Meadow Grove Group, a finance and investment firm with
which he has been associated since 1974. Mr. McGuffin is also the Chief
Executive Officer of California Adventist Federal Credit Union. Mr. McGuffin
also heads up First Interurban Development Corporation a non-profit financial
corporation which he founded in 1981. Mr. McGuffin is also currently licensed as
a securities representative and as a commodities futures principal.
The Directors receive an annual retainer plus fees and
expenses for each Board meeting and Audit Committee meeting attended (for the
latest fiscal year, the Directors each received $4,500 for their attendance at
Board meetings and Audit Committee meetings). Pursuant to the terms of the
Administration Agreement, the Fund's Administrator pays all compensation of
officers of the Fund, and no person receives any compensation directly from the
Fund for acting as an officer of the Fund. However, such officers may be deemed
to receive remuneration indirectly from the Fund because the Administrator is
paid an administrative fee by the Fund.
As of January 12, 1996, the following persons held of record
5% or more of the outstanding shares of the Fund: Repub &
B-5
<PAGE>
Co., c/o Imperial Trust, 727 W. 7th Street, Suite 400, Los Angeles, California
90071 (77%); and RNC Capital Management Co., 11601 Wilshire Boulevard, 25th
Floor, Los Angeles, California 90025 (19%).
As of such date, the number of outstanding shares of the Fund
owned by the officers and Directors of the Fund as a group was less than 1% of
the outstanding shares of the Fund.
While the Fund is not required and does not intend to hold
annual meetings of shareholders, such meetings may be called by the Directors in
their discretion, or upon demand by the holders of 10% or more of the
outstanding shares of the Fund for the purpose of electing or removing
Directors. Shareholders may receive assistance from the Fund in communicating
with other shareholders, in connection with the election or removal of
Directors, pursuant to the provisions contained in Section 16(c) of the 1940
Act.
INVESTMENT ADVISORY AND OTHER SERVICES
The Fund has entered into an Investment Advisory Agreement
with RNC Capital Management Co. (the "Investment Adviser"). The principal
business address of the Investment Adviser is 11601 Wilshire Boulevard, 25th
Floor, Los Angeles, California 90025. The Investment Adviser is an indirect
subsidiary of Bank Austria Aktiengesellschaft (the "Bank"), a banking
organization which is organized under the laws of and domiciled in the Republic
of Austria. Anteilsverwaltung-Zentralsparkasse owns a majority of the voting
securities of the Bank, and the Republic of Austria and Wiener Stadtische each
own more than 5% of the voting securities of the Bank. No other single entity
owns more than 5% of the issued and outstanding stock of the Bank.
The Directors and principal executive officers of the
Investment Adviser are: Daniel J. Genter, Jr., President, Chief Executive
Officer and Director; Thomas Pastore, Vice President/Assistant Secretary and
Director; James O'Neill, Vice President/Assistant Treasurer and Director;
Nicanor M. Mamaril, Senior Vice President, Treasurer and Secretary; Jan Kallik,
Senior Vice President and Director of Equities Research; A. Robert Blais, Senior
Vice President and Director of Fixed Income; Bruce A. Mandel, Senior Vice
President and Director of Marketing, and John G. Marshall, Senior Vice President
and Director of Equity.
Subject to supervision by the Fund's Board of Directors, the
Investment Adviser is responsible for the actual management of the Fund's
portfolio and constantly reviews the holdings of the portfolio in light of its
own research analysis and analyses from other relevant sources. The
responsibility for making decisions to buy, sell or hold a particular security
rests with the Investment Adviser. The Investment Adviser provides the portfolio
managers for the Fund, who consider analyses from
B-6
<PAGE>
various sources, make the necessary investment decisions and place transactions
accordingly.
Unless earlier terminated as described below, the Investment
Advisory Agreement will continue in effect for a one-year term which would
expire on December 31, 1996. The Agreement will continue in effect for
successive one-year periods thereafter if approved annually (a) by the Board of
Directors of the Fund or by a majority of the outstanding voting shares of the
Fund and (b) by a majority of the Directors who are not parties to such
contracts or interested persons (as defined in the Investment Company Act of
1940) of any such party. The Agreement terminates upon assignment and may be
terminated without penalty upon 60 days' written notice at the option of either
party thereto or by the vote of the shareholders of the Fund.
In the event the operating expenses of the Fund (including the
fees payable to the Investment Adviser but excluding taxes, interest, brokerage
and extraordinary expenses and the fees paid under the Fund's Distribution and
Shareholder Servicing Plan) for any fiscal year exceed the expense limitations
applicable to the Fund imposed by state securities laws or any regulations
thereunder, the Investment Adviser will reduce its fee by the extent of such
excess and, if required pursuant to any such laws or regulations, will reimburse
the Fund in the amount of such excess. At present the most restrictive expense
limitation would require the Investment Adviser to reimburse the Fund if, during
any fiscal year of the Fund, ordinary operating expenses exceed 2.5% of the
Fund's first $30 million of average net assets, 2.0% of the next $70 million of
average net assets and 1.5% of the remaining average net assets. The Investment
Adviser undertakes to pay or refund to the Fund any amount by which such
expenses exceed this expense limitation. The payment of the management fee at
the end of any month is reduced so that there is no accrued but unpaid liability
under this expense limitation. In addition, from time to time the Investment
Adviser may voluntarily reduce its fee or reimburse all or a portion of the
Fund's other expenses, which reimbursement will have the effect of lowering the
overall net expense ratio of the Fund and of increasing its yield or return to
investors for the period for which such expenses were payable.
For the years ended September 30, 1993 , 1994 and 1995 total
fees payable by the Fund to the Investment Adviser were $61,195 , $64,897 and
$106,810, respectively. The amount of the management fee paid by the Fund
reflects a voluntary fee reduction by the Investment Adviser which is
anticipated to continue for the current fiscal year. In the absence of this fee
reduction, the rate of management fee payable under the Investment Advisory
Agreement would be 0.41%.
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LICENSE OF INITIALS. The Investment Adviser has granted the Fund a non-exclusive
license to use the initials "RNC" in its name for so long as the Investment
Adviser serves as investment adviser to the Fund.
PORTFOLIO TRANSACTIONS
The cost of executing portfolio securities transactions of the
Fund will primarily consist of dealer spreads and underwriting commissions. The
money market securities in which the Fund invests are traded primarily in the
over-the-counter market. Bonds and debentures are usually traded
over-the-counter, but may be traded on an exchange. Where possible, the Fund
will deal directly with the dealers who make a market in the securities involved
except in those circumstances where better prices and execution are available
elsewhere. Such dealers usually are acting as principal for their own accounts.
On occasion, securities may be purchased directly from the
issuer. Bonds and money market securities also are generally traded on a net
basis and do not normally involve either brokerage commissions or transfer
taxes. Therefore, the Fund rarely pays any brokerage commissions. During the
three fiscal years ended September 30, 1993 , 1994 and 1995, the Fund paid no
brokerage fees.
PURCHASE OF SHARES
As described in the Prospectus, the shares of the Fund are
offered on a continuous basis at a price equal to the net asset value per share
next determined after receipt of a purchase order in proper form.
NET ASSET VALUE. The value of the Fund's portfolio securities is determined on
each day the New York Stock Exchange ("NYSE") is open for trading. The NYSE is
open on business days other than certain holidays (New Year's Day, Washington's
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day). The Fund uses the amortized cost method of valuation.
The amortized cost method of valuation involves valuing a security at its cost
on the date of purchase, and thereafter (absent unusual circumstances) assuming
a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by this method, is higher or lower than the
price the Fund would receive if it sold the instrument. During such periods the
yield to investors in the Fund may differ somewhat from that obtained in a
similar fund which uses other methods to
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determine the fair or market value of its portfolio securities. The Fund intends
to use its best efforts to maintain a constant net asset value of $1.00 per
share. If net unrealized gains or losses were to exceed $.005 per share, the
Fund's net asset value would deviate from $1.00 per share. The Fund endeavors to
reduce the amount of unrealized gains and losses which result from, among other
things, interest rate changes, by maintaining a dollar weighted average
portfolio maturity of less than 90 days.
INDIVIDUAL RETIREMENT ACCOUNTS. An investor desiring to purchase shares in the
Fund through an individual retirement account may establish such an account
through the Fund's custodian, Star Bank. Through such an account, investments
may be made in the Fund and certain of the other mutual funds sponsored by the
Investment Adviser. Star Bank charges an initial establishment fee and an annual
custodial fee for each account. Information with respect to these accounts is
available upon request from the Fund or First Fund Distributors, Inc., the
Fund's principal underwriter. The minimum investment for an individual
retirement account is $250.
Capital gains and income received in such an account are
generally exempt from federal income taxation until distributed from the
account. Capital gains and ordinary income may be taxable in whole or in part,
however, if the account has borrowed to purchase or carry Fund shares. Investors
considering participation in such an account should review specific tax laws
relating thereto and should consult their attorneys or tax advisers with respect
to the establishment and maintenance of such an account.
REDEMPTION OF SHARES
Reference is made to "Redemption of Shares --Repurchase" in
the Prospectus for a discussion of the redemption and repurchase rights of
shareholders.
The right to redeem shares or to receive payment with respect
to any such redemption may be suspended for more than seven days only for
periods during which trading on the NYSE is restricted as determined by the
Securities and Exchange Commission or the NYSE is closed (other than customary
weekend and holiday closings), for periods during which an emergency exists as
defined by the Securities and Exchange Commission as a result of which disposal
of portfolio securities or determination of the net asset value of the Fund is
not reasonably practicable, and for such other periods as the Securities and
Exchange Commission may by order permit for the protection of the Fund's
shareholders.
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The Prospectus indicates when signature guarantees may be
required to effect a redemption. A signature guarantee is a widely accepted way
to protect stockholders and the Fund by verifying the signature on the request.
Signature guarantees should not be qualified in any way, whether by date or
otherwise. Signatures must be guaranteed by an "Eligible Guarantor Institution"
and not by a notary public or any other person or entity. An "Eligible Guarantor
Institution" means a bank, trust company, broker, dealer, municipal or
government securities broker or dealer, credit union, national securities
exchange, registered securities association, clearing agency or savings
association that is a participant in the Securities Transfer Agents Medallion
Program endorsed by the Securities Transfer Association.
Subject to the Fund's compliance with applicable regulations,
the Fund has reserved the right to pay the redemption or repurchase price,
either totally or partially, by a distribution in kind of securities (instead of
cash) from the Fund's portfolio. Such regulations would require, among other
things, that the Fund commit to pay in cash all requests for redemption by any
shareholder, limited in amount with respect to each shareholder during any
90-day period to the lesser of $250,000 or 1% of the net asset value of the Fund
at the beginning of such period. The Fund anticipates that it would make
redemptions in kind only if it received redemption requests with respect to a
substantial portion of its net assets at a time when disposition of a
substantial portion of its portfolio securities would be disadvantageous. The
securities distributed in such a distribution would be valued at the same price
as the price assigned to such securities in calculating the net asset value of
the Fund. If a shareholder receives a distribution in kind in securities, in
most instances he or she will incur brokerage charges when he or she converts
the securities received into cash.
TAXES
In all prior fiscal years the Fund has qualified for and
elected the special tax treatment afforded regulated investment companies under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). The
Fund intends to continue to so qualify. Under such provisions, the Fund will not
be subject to federal income tax on that part of its net ordinary income and net
realized capital gains which it distributes to shareholders. To qualify for such
tax treatment the Fund must, among other things, pay to its shareholders in each
taxable year at least 90% of its investment company taxable income (consisting
of investment income and short-term capital gains) and derive less than 30% of
its gross income in each taxable year from gains (without deduction for losses)
from the sale or other disposition
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of securities held for less than three months. If in any taxable year the Fund
does not qualify as a regulated investment company, all its taxable income will
be taxed to the Fund at corporate rates and distributions will be taxed to the
shareholders as dividends to the extent of the Fund's current and accumulated
earnings and profits. The Code also imposes a non-deductible 4% excise tax on
the excess, if any, of the Fund's "required distribution" over its actual
distributions in any calendar year. Generally, the "required distribution" is
98% of a fund's ordinary income for the calendar year plus 98% of its capital
gain net income recognized for the one-year period ending on October 31 plus
undistributed amounts from prior years. The Fund anticipates that it will be
able to meet such distribution requirements and will not be subject to the 4%
excise tax.
Dividends paid by the Fund from its short-term investment
income, and distributions of the Fund's net realized capital gains, are taxable
to shareholders as ordinary income. Dividends and distributions are taxable as
described, whether received in cash or reinvested in additional shares of the
Fund.
Some shareholders may be subject to a 31% withholding tax on
reportable dividend distributions, capital gains distributions and redemption
payments ("backup withholding"). Generally, shareholders subject to backup
withholding will be those for whom taxpayer identification numbers are not on
file with the Fund or who, to the Fund's knowledge, have furnished an incorrect
number. When establishing an account, an investor must certify under penalties
of perjury that such number is correct and that he or she is not subject to
backup withholding. Foreign shareholders may also be subject to other
withholding requirements.
Fund shares are redeemable at the option of the Fund if, in
the opinion of the Fund, ownership of the shares has or may become concentrated
to an extent which would cause the Fund to be deemed a personal holding company
within the meaning of the Code, except in the event the value of a shareholder's
shares falls below $750 ($250 for individual retirement accounts) as the result
of shareholder redemptions. In the event of such concentration, the Fund may
compel the redemption of, reject any order for, or refuse to give effect on the
books of the Fund to the transfer of, Fund shares in an effort to maintain the
ownership of Fund shares so as to prevent that consequence. The Fund, however,
assumes no responsibility to compel redemptions or to reject any orders.
Depending upon the extent of the Fund's activities in those
states and localities in which its offices are maintained or in which its agents
or independent contractors are located, the Fund may be subject to the tax laws
of such states or localities. In addition, the treatment of the Fund and its
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shareholders under applicable state and local tax laws may differ from their
treatment under the federal income tax laws. For example, distributions of net
investment income (including capital gains) may be taxable to shareholders as
dividend income. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
The foregoing is a general and abbreviated summary of certain
provisions of the Code and Treasury Regulations currently in effect. For
complete provisions, reference should be made to the pertinent Code sections and
Treasury Regulations promulgated thereunder. The Code and Treasury Regulations
are subject to change by legislative or administrative action. Heller, Ehrman,
White & McAuliffe has expressed no opinion on the tax matters discussed herein.
DIVIDENDS
All of the Fund's net investment income is declared as
dividends daily. Dividends are paid monthly and automatically reinvested in
additional Fund shares at net asset value and credited to the shareholder's
account or, at the shareholder's option, paid in cash.
The Fund's net investment income for dividend purposes is
determined daily. Such determination will be made as of 4:00 p.m. Eastern time
and, on days when the Fund's net asset value is determined, immediately prior to
such determination. Immediately after each determination of net asset value, the
Fund will declare a dividend (with respect to one or more days) payable to
shareholders of record as of 2:00 p.m. Eastern time on such day. Each day's
dividend will be declared and paid with respect to shares effectively purchased
at or before 2:00 p.m., but will not be declared or paid with respect to shares
effectively redeemed at or before 2:00 p.m. Net income of the Fund (from the
time of the immediately preceding determination thereof) will consist of (i)
interest accrued or discount earned (including both original issue and market
discount), (ii) plus or minus all realized gains and losses, if any, on the
portfolio securities of the Fund, (iii) less the estimated expenses of the Fund
applicable to that dividend period.
The Fund intends to use its best efforts to maintain its net
asset value at $1.00 per share. As a result of a significant expense or realized
or unrealized loss, it is possible that the Fund's net asset value may fall
below $1.00 per share. See "Purchase of Shares -- Net Asset Value."
Should the Fund incur or anticipate any unusual or unexpected
significant expense or loss which would affect disproportionately the Fund's
income for a particular period, the
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Board of Directors would at that time consider whether to adhere to the present
dividend policy described above or to revise it in the light of the
then-prevailing circumstances in order to ameliorate, to the extent possible,
the disproportionate effect of such expense or loss on then existing
shareholders. Such expenses or losses may nevertheless result in a shareholder's
receiving no dividends for the period during which he or she held his or her
shares and in his or her receiving upon redemption a price per share lower than
that which he or she paid.
Shareholders may receive their dividends in cash monthly by
completing the appropriate section of the Account Application. Such cash
distributions will be paid by check within seven days after the end of each
month. The election to receive cash distributions may be made at the time of
purchase of Fund shares or at any time subsequent thereto by giving written
notice to the Transfer Agent. Dividends and distributions are taxable to
shareholders whether distributed in cash or reinvested in additional shares. See
"Taxes."
The Transfer Agent will send each shareholder a monthly
statement showing the total number of shares owned as of the last business day
of the month, as well as the current month's and year-to-date dividends paid in
terms of total cash distributed and, for those shareholders which have dividends
reinvested, the number of shares acquired through the reinvestment of dividends.
SHAREHOLDER SERVICING PLAN AND MARKETING PLAN
The Fund has adopted a Shareholder Servicing Plan and a
Marketing Plan pursuant to Rule 12b-1 promulgated under the Investment Company
Act of 1940 (the "1940 Act").
Both the Shareholder Servicing Plan and the Marketing Plan
require annual renewal by a vote of the Fund's Board of Directors including
those Directors who are not "interested persons," as defined in the 1940 Act, of
the Fund, and who have no direct or indirect interest in either plan or any
related agreements (referred to herein as "disinterested Directors"). Either
plan may be terminated by the Fund at any time if so voted by a majority of the
disinterested Directors or by holders of a majority of the Fund's outstanding
shares.
Neither the Shareholder Servicing Plan nor the Marketing Plan
may be amended to increase materially the amounts payable to Midvale Securities
Corporation and Investment Company Administration Corporation, respectively,
unless approved by a majority of the outstanding voting shares of the Fund, as
defined in the 1940 Act, and may not be amended in any other material respect
unless approved by a majority of the disinterested Directors. The Shareholder
Servicing Plan and the Marketing Plan
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both require that quarterly reports be made to the Board of Directors detailing
the payments made under each plan and the expenses for which reimbursement is
being sought. The Shareholder Servicing Plan contemplates that Midvale may
delegate its shareholder servicing functions for certain shareholder accounts to
other persons and compensate such persons accordingly. No payments were made by
the Fund under the Shareholder Servicing Plan or the Marketing Plan during the
fiscal year ended September 30, 1995.
The Board of Directors, including the disinterested Directors,
in approving the Plans for another year concluded that, in the exercise of their
business judgment and in light of their fiduciary duties, there is a reasonable
likelihood that both the Shareholder Servicing Plan and the Marketing Plan could
be of value to benefit the Fund and its shareholders, and could be used to
increase shareholder satisfaction, and preserve and expand the Fund's existing
shareholder base. Among the possible benefits considered by the disinterested
Directors was the increased potential of a continuous cash flow arising out of
the retention of current shareholders and the expansion of the fund to include
new shareholders, enabling the Fund to meet redemptions and to take advantage of
buying opportunities without having to make unwarranted liquidations of
portfolio securities. Another benefit anticipated by the disinterested Directors
is the potential for increasing the size of the Fund and thereby reducing the
Fund's operating costs on a per share basis.
Yield Calculation
- -----------------
The Fund quotes current yield and for this purpose the yield
quoted is the net average annualized yield for the most recent 7-day period. The
yield quoted is computed by assuming that an account is established with one
share (the "one-share account") on the first day of the period. To arrive at the
quoted yield, the net change in the value of the one-share account for the 7-day
period (which includes interest accrued and original issue discount earned, and
is less premium amortized and expenses accrued, but does not include any
realized gains or losses or unrealized appreciation or depreciation) is
multiplied by 365 and then divided by 7 (the number of days in the period), with
the resulting figure carried to the nearest one hundredth of one percent. The
Fund also furnishes a quotation of effective yield that assumes the reinvestment
of dividends for a 365-day year and a return for the entire year equal to the
average annualized yield for the period, which is computed by adding 1 to the
net change in the value of the one-share account during the period, raising the
sum to a power equal to 365 divided by 7, and then subtracting one from the
result.
Yields for the seven-day period ended September 30, 1995 were
as follows:
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Current yield........................................ 4.82%
Effective yield ..................................... 4.94%
The Fund may also quote the average dollar-weighted portfolio
maturity for the corresponding seven-day period. At September 30, 1995 this
average was 55 days.
PRINCIPAL UNDERWRITER
First Fund Distributors, Inc. is currently the principal
underwriter of the Fund's shares pursuant to an underwriting agreement with the
Fund. The Fund's shares are sold to the public on a best efforts basis in a
continuous offering without a sales load or other commission. For each of the
fiscal years ended September 30, 1993 , 1994 and 1995, the Fund's principal
underwriter received no underwriting commission. The Fund's principal
underwriter is under common control with Investment Company Administration
Corporation, the Fund's administrator and the marketing agent under the Fund's
Marketing Plan.
FINANCIAL STATEMENTS
The Fund's 1995 Annual Report (the "Report") to Shareholders,
including audited financial statements for the fiscal year ended September 30,
1995, has been previously sent to shareholders. The financial statements and
independent auditors' report in the Report are incorporated in this Statement of
Additional Information by reference to the Report, which has been filed with the
Securities and Exchange Commission. Additional copies of the Fund's 1995 Annual
Report to Shareholders may be obtained at no charge by writing or telephoning
the Fund at the address or telephone number appearing on the front page of this
Statement of Additional Information.
The Fund's independent certified public accountants and
auditors for the fiscal year ending September 30, 1995 are Tait, Weller & Baker,
whose address is Two Penn Center Plaza, Philadelphia, Pennsylvania 19102. The
Fund's custodian is Star Bank, P.O. Box 1118, Cincinnati, Ohio 45201-1118.
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APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE COMMERCIAL PAPER RATINGS
Moody's Investors Service commercial paper ratings are
opinions of the ability of issuers to repay punctually promissory obligations
not having an original maturity in excess of nine months. Moody's employs three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers. The first of these three designations,
representing the securities in which the Fund may invest, is "Prime-1." Issuers
rated "Prime-1" (or related supporting institutions) have a superior capacity
for repayment of short-term promissory obligations.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS:
A Standard & Poor's Corporation commercial paper rating is a
current assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded into four
categories, ranging from "A" for the highest quality obligations to "D" for the
lowest. Ratings are applicable to both taxable and tax-exempt commercial paper.
The highest category is described as follows:
A. Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this
category are further refined with the designation 1, 2 and 3
to indicate the relative degree of safety.
A-1. This designation indicates that the degree of safety
regarding timely payment is very strong.
DESCRIPTION OF CORPORATE BOND RATINGS
MOODY'S CORPORATE BOND RATINGS
Moody's corporate bond ratings are opinions of the relative
investment qualities of bonds. Moody's employs nine designations to indicate
such relative qualities, ranging from "Aaa" for the highest quality obligations
to "C" for the lowest. Issues are further refined with the designation 1, 2 and
3 to
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indicate the relative ranking within designations. The highest two designations
are described as follows:
Aaa. Bonds in this category are judged to be of the best
quality. They carry the smallest degree of investment risk and
are generally referred to as "gilt edge." Interest payments
are protected by a large or by an exceptionally stable margin
and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of
such issues.
Aa. Bonds in this category are judged to be of high quality by
all standards. Together with the Aaa group they comprise what
are generally known as high grade bonds. They are rated lower
than the best bonds because margins of protection may not be
as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other
elements present which make the long-term risks somewhat
larger than in Aaa securities.
STANDARD & POOR'S CORPORATE DEBT RATINGS
A Standard & Poor's corporate debt rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. Ratings are graded into ten categories, ranging from "AAA" for the
highest quality obligation to "D for debt in default. Issues are further refined
with a "Plus" or "Minus" sign to show relative standing within the categories.
The highest two categories are described as follows:
AAA. Issues having this rating indicate that capacity
to pay interest and repay principal is extremely
strong.
AA. This debt has a very strong capacity to pay
interest and repay principal and differs from the
higher rated issues only in small degree.
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